Vietnam still struggling to apply Basel II

SGI

Vietnamese banks will be able to measure risks and take initiatives in managing risks if they succeed in applying Basel II.

Model of applying Basel at Vietnamese banks.

Model of applying Basel at Vietnamese banks.

But up until now, Vietnam is still struggling to develop Basel II in ten of its commercial banks, while the rest of the world is already planning to move onto Basel IV.  

The Basel Convention

The Basel Committee on Banking Supervision (BCBS) was established in 1974 by central banks of the G10 countries, with the aim of building a new international financial structure, to replace the Bretton Woods system which had collapsed. Currently, BCBS includes central banks of 27 countries and the European Union (EU). BCBS has developed a series of highly influential policy recommendations, called The Basel Convention.

The Basel Convention has many purposes, so attention is paid to determining bank capital and capital ratios. Level 1 is the base capital (equity capital and provision for loan losses). Level 2 includes investment income, long-term debts with maturity of more than five years, and hidden reserves. Level 3 is the total capital invested in RWA (risk weighted assets) at not less than 8%.

Basel II was implemented in June 2004 with the aim of solving any shortcomings of Basel I, with some changes, such as the risk coefficient must be consistent with risk rating rather than fixed; increased types of guarantees (such as collaterals), for example cash and guarantors; and changes in contingency accounting. Basel II has 3 pillars: (i) Allocating economic capital of banks; (ii) Regulatory authorities having power to decide more complex and bureaucratic issues; (iii) Market publication standards (risk and capital allocation).

According to Mr. Peter Verhoeven, CEO of Financial Consulting Company-6 Sigma, currently, developing countries are ready for IFRS 9 (International Financial Reporting Standards published by the International Accounting Standards Board). IFRS 9 has resolved accounting problems for financial systems in three main topics: classification and measuring of financial systems, decline in financial assets and hedging of preventive accounting, thus getting better ratings, and increasing shareholders value.

At present, Basel II is being widely deployed globally, while Basel III has been effective since January 2015, with requirement to tighten CAR, capital ratio of 10.5%. Basel IV is currently being built, and is expected to be a consolidated version of the revised Basel III and IFRS 9.

Vietnam still struggling to apply Basel II

Resolution 24/2016/QH14 of the National Assembly and Resolution 27/NQ-CP in 2017 of the Government requires that commercial banks will basically have their own capital according to Basel II standards by 2020, for which there are at least 12-15 commercial banks vying to apply Basel II (standard method or above).

Following this direction, the State Bank has developed a Basel II implementation plan for all departments, on the basis of assessing the readiness of the banking system, construction research and issued regulations on capital adequacy standards, and internal assessment of adequate capital under Basel II standards.

As for commercial banks, a Project Management Board has been set up to implement Basel II; building a plan to deploy Basel II; issue internal regulations on risk management to implement Basel II capital safety standards as per schedule; improve data management and quality; upgrade information systems; and complete the structure and organization to analyze the tasks of the departments according to three defensive lines.

Compared to the rest of the world, the implementation and application of The Basel Convention in Vietnam is slower than many other countries. Challenges are many but we cannot go beyond the trends of the times.
From 2018 to now, many commercial banks have recruited staff in position of Project Managers to calculate risk assets (RWA), with high requirements and priority given to those who have participated in Basel II projects, and management candidates with experience in credit risk management, credit management, and credit supervision. This is because the requirements for Basel II standards are complex and designed and built on experience to suit the development of the financial and banking market.

Meanwhile, the development level of the Vietnamese financial market is much lower. Deploying Basel II standards requires large financial resources of USD 10-15 million, depending on the nature and size of banks. This is also a challenge for medium-sized banks. Besides, database, information technology, information management of commercial banks are still inadequate and not able to meet the requirements. Human resources, awareness of senior executives on risk management are limited, and unable to meet the requirements of international practices.

Up until now, there have been 17 commercial banks (15 domestic banks and two banks with 100% foreign capital) registered to apply Circular 41 ahead of time (stipulating capital adequacy standards according to Basel II standard method of minimum capital requirements and market principles). Ten banks which include Vietcombank, MBB, Techcombank, ACB, VIB, MSB, HDBank, OCB, TPBank and VPBank, have been decided by the Governor to apply for Circular 41 ahead of schedule.

From 1 January 2020, all banks and branches of foreign banks must comply with the capital adequacy ratio prescribed by the standards in Circular 41. Since 2021, banks will have to applied the internal capital adequacy review (ICAAP) process based on Basel II. From 2023, a few banks will apply capital adequacy standards under Basic Improvement Method (FIRB) of Basel II.

Translated by Minh Châu

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